E 20 Change in estimate; useful life and residual value of equipment LO20-4 Ward

Question

E 20

Change in estimate; useful life and residual value of equipment LO20-4 Wardell Company purchased a mini computer on January 1, 2011, at a cost of $40,000. The computer has been depreciated using the straight-line method over an estimated five-year useful life with an estimated residual value of $4,000. On January 1, 2013, the estimate of useful life was changed to a total of 10 years, and the estimate of residual value was changed to $900. Prepare the appropriate adjusting entry for depreciation in 2013 to reflect the revised estimate. Repeat requirement 1 assuming that the company uses the sum-of-the-years'-digits method instead of the straight-line method

Explanation / Answer

40,000 - 4,000 = 36,000 is the depreciable value not the book value (40,000)

(40,000 - 4,000) / 5 = 7,200 original depreciation per year.
Prior to the change in estimates, two years have been depreciated.
40,000 - (7,200 x 2) = 25,600 book value of computer

The useful life is changed to 10 years, so there are 8 years remaining. The new salvage value is now $900.

(25,600 - 900) / 8 = 3,088 new annual depreciation--straight line.
Dr Depreciation Expense 3,088
Cr Accumulated Depreciation 3,088

Part 2

Depreciable cost is still 36,000
Year 1
36,000 x 5/15 = 12,000 depreciation expense
Year 2
36,000 x 4/15 = 9.600 depreciation expense

40,000 - 12,000 - 9,600 = 18,400 book value at the end of 2 years
18,400 - 900 = 17,500 new depreciable cost

There are 8 years remaining, so depreciation for 2013 is:
17,500 x 8/36 = 3,889
Dr Depreciation Expense 3,889
Cr Accumulated Depreciation 3,889

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